AG Schneiderman files suit against Credit Suisse over mortgage fraud

New York Attorney General Eric Schneiderman on Tuesday filed a Martin Act complaint against Credit Suisse Securities LLC.

The Martin Act is a 1921 New York law delegating extraordinary power and discretions to the state’s attorney general in prosecution of financial fraud. In the suit filed Tuesday, Schneiderman accuses the Credit Suisse entity of making fraudulent claims and leaving out negative facts concerning loans it packaged into mortgage backed securities.

The bank, “systematically failed to adequately evaluate the loans, ignored defects that its limited review did uncover, and kept its investors in the dark about the inadequacy of its review procedures and defects in the loans,” Schneiderman claims in a statement.

According to the attorney general, residential mortgage backed bonds the bank created in 2006 and 2007 led to $11.2 billion in losses. The Martin Act complaint seeks repayment of those losses plus other unspecified damages.

Column Financial Inc., a separate and now dormant Credit Suisse entity that is not part of the Martin Act suit, figured in one of the Rochester area’s largest if not the largest commercial real estate debacles, the collapse of failed Webster investor Jason Palmer’s local real estate empire.

Created by Credit Suisse for the sole purpose of making loans to funnel into mortgage backed securities, Column Financial wrote tens of millions of dollars in loans to Palmer-related entities in 2006. These loans were far in excess of the properties’ assessed value. When Palmer’s portfolio was finally foreclosed on, investors who bought bonds backed by his properties claimed to be owed more than $70 million on buildings assessed for less than $10 million.

Both Martin Act complaints come out of investigations mounted by the Residential Mortgage Backed Securities Working Group, a federally organized task force created to ferret out perpetrators of the widespread mortgage fraud acknowledged to have largely spurred the U.S. economy’s 2008 meltdown.

Schneiderman is a co-chair of the task force, which includes representative of the Securities and Exchange Commission and other federal regulators.

The working group’s efforts have been praised as actions long needed to hold accountable the big banks, mortgage brokers and financial firms that fed a frenzy of bad real estate loans written as fodder for mortgage backed bonds. But critics have pointed out that the working group actions only began after the possibility of criminally prosecuting industry executives who promoted such policies expired.